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Contractor confidence dips in first half of 2016

The diffusion index measures forward-looking construction industry expectations in sales, profit margins and staffing levels
Although two indices fell, all three indices remain well above the threshold for growth

Associated Builders and Contractors | Oct 13, 2016

WASHINGTON, D.C. — The average contractor is less confident regarding business prospects for the next six months, but the nonresidential construction recovery is anticipated to remain in place, according to the Associated Builders and Contractors (ABC) Construction Confidence Index (CCI) released today. The diffusion index measures forward-looking construction industry expectations in sales, profit margins and staffing levels, with readings above 50 indicating growth.

According to the most recent survey, during the first half of 2016:

Sales expectations fell from 67.0 to 64.1;

Profit margin expectations fell from 62.8 to 61.1; and

Staffing level intentions rose from 63.9 to 64.9.

Although two indices fell, all three indices remain well above the threshold for growth. This is of particular importance since construction is one of the few significant drivers of economic growth aside from ongoing increases in consumer outlays.

“The nation continues to add jobs at satisfactory levels, private capital remains abundant, average hourly earnings growth is accelerating, consumer spending is expanding and a federal highway bill was passed late last year. All of these factors suggest that the nonresidential construction spending recovery is poised to continue,” stated ABC Chief Economist Anirban Basu. “Still, there is a growing list of worries with which construction executives must contend, and undoubtedly, this has served to diminish confidence across several dimensions.

“There remains of course a near-constant worry about skilled labor shortages, which have predictably worsened as the duration of the recovery has lengthened,” said Basu. “The multifamily residential building boom has also rendered it more challenging for nonresidential contractors to secure available workers and subcontractors, leading to rising construction costs. In many instances, purchasers of construction services continue to behave as if the buyers’ market for construction services remains in place. This has helped to produce flatter margins, with construction firm revenues unable to keep up with rising compensation costs. After two years of decline, materials prices also represent a growing inflationary risk to construction firms.

“Undoubtedly, some observers will suggest that the 2016 election cycle has also served to suppress confidence among construction executives,” said Basu. “While some executives may be leery of the election cycle’s impact, construction firm operators are concerned about other geopolitical issues, including record levels of indebtedness worldwide and negative interest rates in much of the advanced world. Despite these myriad risks to the longer term nonresidential construction outlook, the near-term outlook remains benign.”